1. Shelter welcomes the committee's decision
to hold an inquiry into the government's plans to change the system
of UK financial regulation. As a housing, welfare and debt advice
provider, Shelter's expertise in this area lies in the regulation
of mortgage lending and mortgage arrears management, in the context
of consumer protection. Therefore this submission will set out
Shelter's position on the principles for reform in this area.

2. Though levels of repossessions and mortgage
arrears have dropped since last year, the number of homeowners
in difficulty is still worryingly high and the risk of another
rise in repossessions is acute. For this reason, and for the sake
of long term economic and social sustainability, it is crucial
that a strong and effective regulatory system is put in place
to address the historical flaws in the existing consumer protection
regime.

3. The new regime must:

 Be based on clear, rules-based regulation
that does not allow too much flexibility for interpretation.

 Be tough on lenders, with enforcement
action and public naming and shaming.

 Promote responsible lending.

 Incorporate a strong consumer voice and
a system of consumer redress.

 Be transparent so that consumers and
lenders fully understand their rights and responsibilities.

 Have systems in place to ensure that
the new agencies work together effectively.

 Bring second-charge and buy-to-let lending
under the remit of the CPMA.

EVIDENCE

4. Shelter has considerable experience and
expertise in the area of mortgage arrears and repossessions, both
from a services and a policy perspective. Shelter staff provide
practical advice, support and innovative services to over 170,000
people a year, helping people with housing, debt and welfare issues
through face-to-face, online and telephone provision. Our services
have seen a large increase in queries from clients in mortgage
arrears since 2008. Between April 2009 and May 2010 Shelter provided
mortgage debt advice to over 7,000 households, of which more than
4,700 households were helped under Shelter's Homeowner Mortgage
Support (HMS) contract, funded by the Department of Communities
and Local Government (CLG).

5. Though low interest rates and government
safety nets such as Support for Mortgage Interest (SMI) have ensured
that the rate of repossessions has not been as high as was initially
feared, for many households the threat of repossession has not
passed. At the end of June 2010, there were over 245,000 mortgages
more than three months in arrears in the UK.[13]
Shelter is concerned that a rise in interest rates, the effects
of unemployment and the announced cuts to SMI will mean that arrears
remain unusually high well into 2011. A YouGov survey commissioned
by Shelter in May found that 29% of mortgage holders were unprepared
for the increase in mortgage payments when interest rates inevitably
rise.[14]

6. Even once the economy has fully recovered
there will still be some households who find themselves in mortgage
arrears and at risk of repossession, but it is in the UK's economic
and social interest that the number of repossessions is minimised.
In addition to the costs of re-housing families there are also
many social costs associated with repossession, including poor
educational attainment and poor health outcomes of children made
homeless and living in temporary accommodation. NEF Consulting,
in a report for the Law Centres Federation, calculated that preventing
the eviction of a family of four can result in a saving to government
(national and local) of £34,000.[15]

7. The importance of having a strong and
effective regulatory regime cannot be underestimated. There remain
a number of long-term regulatory issues that need to be addressed
to ensure that the repossessions crisis does not deepen now, or
reoccur later. Shelter welcomes the fact that the government is
attempting to address these issues and that it appears to be taking
a fundamental and long-term view. Broadly speaking, Shelter is
not necessarily concerned about where exactly consumer protection
sits within the regulatory regime, as long as there is tough regulation,
proper enforcement of that regulation, and a strong consumer voice.

8. However, with three new agencies being
introduced to replace the FSA, there are risks that the new regime
could fail to operate as a coherent whole, and systems must be
put in place to ensure that the new agencies work together effectively.
Mortgage regulation is already too fragmented, with second charge
lending being the responsibility of the Office of Fair Trading
rather than the Financial Services Authority (FSA). Our recommendation
is that all mortgage regulation should sit in the same place,
to promote clarity and consistency of practice across the mortgage
market, and minimise confusion for consumers. Having only one
regulator would ultimately make compliance and associated costs
more straightforward for lenders, which could result in lower
costs to borrowers. Currently there is no regulation at all of
buy-to-let lending or securitised mortgages, and these need to
be brought into the new regulatory framework.

9. It is crucial that the new regime addresses
the problems with consumer protection that have existed under
the old system, though it must be emphasised that the FSA is now
vastly improved, with a much better arrears management and enforcement
regime. Shelter largely supports the measures proposed by the
FSA in its recent consultation paper Mortgage Market Review:
Irresponsible lending, and we urge the government to press
ahead with these reforms alongside the proposed structural changes.
The new system must build on the process of improvement that has
already been initiated, rather than set it back.

10. In addition to this, Shelter calls on
the government to ensure that the new regulatory regime incorporates:

 Principles rather than rules-based regulation.
The old MCOB (Mortgage Conduct of Business) left far too much
flexibility for interpretation (for example in the use of terms
such as "fairly" and "reasonably" without
definition). More prescriptive, binding rules can promote consistent
standards across the lending industry and give borrowers a much
clearer idea of what to expect.

 A rigorous approach towards lenders.
In the past, the FSA has failed to take enforcement action against
specific lenders, even when they have been found guilty of bad
practice.

 The willingness to name and shame. The
FSA has in the past refused to publicly name firms that have been
found guilty of bad practice, and therefore borrowers have not
been sufficiently empowered with the knowledge to challenge their
lenders directly.

 Provisions for consumer redress. There
must be appropriate systems in place to provide consumer redress
for borrowers who have been mistreated by lenders and who may
have suffered significant financial loss as a result.